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Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion. a. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume ( MPC ) to be? b. Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?

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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985
BuyFind

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781337091985

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Chapter
Section
Chapter 16, Problem 7PA
Textbook Problem

Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion.

a. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be?

b. Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?

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